03 November 2011

NSW CA on “legitimate expectation” and relevance of a purchase offer in the context of oppression proceedings


The decision of the NSW Court of Appeal in Tomanovic v Global Mortgage Equity Corporation Pty Ltd
[2011] NSWCA 104 is a helpful decision on several recurring issues relating to the remedy for oppressive conduct under Part 2F.1 of the Corporations Act. These include: an explanation of the term "legitimate expectation", the relevance of a buy-out offer and the use of the oppression remedy in response to a contractual claim.

The facts

This was not the typical oppression scenario of an exclusion from management after a falling out in a quasi-partnership company. Rather the case concerned two protagonists who each had responsibility for separate aspects of their merged business interests: Mr Sayer operated the finance side of the business and Mr Tomanovic operated the non-finance side of the business.

In late 2004, they agreed to go their separate ways and signed a non-binding heads of agreement under which Mr Tomanovic was to be paid $6 million for his share of the business. Mr Tomanovic voluntarily resigned as a director of the companies running the finance side of the business and ceased to receive a regular income from those businesses. Mr Sayer made substantial payments to Mr Tomanovic, which were to be credited towards the consideration for his shares in the business when the final agreement was executed, but in the meantime were characterised as loans.

The initial heads of agreement were never formalised, and in 2006 a new non-binding heads of agreement was signed by the parties, under which Mr Tomanovic was to be paid only $5 million, and other terms were also less favourable to him. This agreement was never formalised either.

In 2008, Mr Tomanovic sought to be reinstated as a director of the financial companies, but Mr Sayer rebuffed these suggestions.

Mr Sayer successfully sued in the common law division of the Supreme Court of NSW for repayment of the amounts paid to Mr Tomanovic by way of loan. In response, Mr Tomanovic bought this oppression proceeding.

The decision

The NSW CA reversed the first instance decision and found that the cumulative effect of Mr Sayer's conduct was oppressive. It made an order for the purchase of Mr Tomanovic's shares (declining the more drastic remedy of a winding up order). Essentially this was a decision on the facts. However, the Court's comments on legitimate expectations and the role of a reasonable offer to buy-out the plaintiff's shares are of wider interest, as comments of an intermediate appellate court on topics that frequently arise in oppression litigation.

(a)    Legitimate expectation

Campbell JA (who delivered the leading judgment) referred to the decision of the House of Lords in O'Neill v Phillips [1999] 1 WLR 1092, where Lord Hoffmann had regretted his use of the term "legitimate expectation" in earlier cases and had explained that "it should not be allowed to lead a life of its own". Rather, it was a consequence, not a cause, of equitable principles that would make it unfair for one party to exercise legal rights in a corporate context.

Campbell JA also referred to the comments of the members of the NSW Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd
[2001] NSWCA 97, all of whom had agreed with Lord Hoffman's comments in O'Neill v Phillips, although Priestley J nevertheless regarded "legitimate expectation" as "a useful label for describing the result of the way in which equitable considerations operate."

Campbell JA expressed his own reluctance to use the language of "legitimate expectation" for the additional reason that it might suggest that the subjective expectations of a party are of importance for the oppression remedy. This would not be consistent with statements of Basten JA in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 (who in turn was quoting from the judgment of Young J in Morgan v 45 Flers Avenue
Pty Ltd) that unfairness for the purpose of s 232 is assessed by reference to whether "objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair".

Campbell JA went on to explain that oppression is not confined to the situation where there is a breach of contract or an estoppel or conduct that would justify the winding up of the company.

(b)    The role of a "reasonable offer" in whether oppression is established.

There is a strong theme in the UK cases that it is not oppressive exclude a quasi-partner from management of a company if the "oppressor" has made a reasonable offer for the purchase of the excluded shareholder's shares.

Campbell JA rejected the blanket adoption of this approach in Australia, saying that "the application of s 232 is not properly approached by seeking to create rules containing terms that are not found in the legislation, like 'exclusion from management' and 'reasonable offer'."

Because this case was not a typical case of exclusion from management, this approach was not strictly relevant. Campbell JA nevertheless went on to consider the effect of the "offers" in this case. His Honour was prepared to have regard to the offers in the heads of agreement for this purpose nothwithstanding that they were not contractually binding, applying the approach of Barrett J in Nassar Innovative Precasters Group Pty Ltd [2009] NSWSC 342. Campbell JA was also not prepared to permit departure from the concession in the September 2007 documents that the offer was reasonable in its terms. However, his Honour was not prepared to conclude that there was no oppression. In this regard, the fact that the "offer" in the September 2007 documents was not capable of being accepted to constitute a binding contract was relevant, as was the fact that it was submitted on the basis that there might be queries or comments and at a time when Mr Tomonavoic was overseas.

28 October 2011

Meaning of “rights” of members of a managed investment scheme

In Re Centro Retail Limited and Centro MCS Manager Limited
[2011] NSWSC 1175, Barrett J had to consider the operation of s 601GC(1)
of the Corporations Act, and, in particular whether a proposed change to the constitution of a registered scheme would "adversely affect members' rights".

The change concerned the modification to the constitutional provision governing the price at which new units would be issued, and was an application to the court for judicial advice.

In the earlier case of Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698, (which had also concerned a modification of the constitution by which the issue price of new units would be changed) Gordon J had expressed the opinion that the constitutional provision setting the issue price for new units was the source of a contractual right on the part of each existing member to insist that no new unit be issued except at that price.

Barrett J distinguished the Premium Income Fund case on the basis that Gordon J's opinion was not necessary for the decision. Rather her Honour's decision was made on the narrower basis that the responsible entity had not identified let alone considered the impact of the change on the relevant right, and so had not as a matter of fact been of the state of mind contemplated by the words "reasonably considers that change will not adversely affect members' rights."

Barrett J relied on the line of cases considering the meaning of "rights" in the context of cases challenging a variation of the class rights of shareholders, including: White v Bristol Aeroplane Co Ltd [1953] Ch 65 and John Smith's Tadcaster Brewery Ltd [1953] Ch 308. Both were cases concerning new share issues that diluted the voting power of the complaining preference shareholders and did but not change the voting rights attached to the preference shares. In both cases, the courts drew a distinction between a variation of rights and a variation in the enjoyment of those rights, and held that the share issues fell into the latter category.

Barrett J concluded that it was open to the responsible entity in the case before him to form, on reasonable grounds, the opinion that no "right" of members would be affected by the proposed change to the constitution.

His Honour went on to distinguish the question of whether the power of the responsible entity to modify the constitution under s 601GC(1)(b) was available from the question of whether that power might properly be exercised.

As a power vested in a trustee, it had to be exercised honestly, and in good faith for the benefit of the beneficiaries. However, Barrett J found on the facts that the trustee had, on reasonable grounds, come to the view that the modification would benefit the members as beneficiaries.